A good friend drew my attention to a series of tweets by Shri. S. Gurumurthy on the RBI Governor. Here are some of the tweets and my comments on them. The tweets are in italics.
Please note that I hold Shri. S. Gurumurthy in high regard. He is a man of exceptional integrity. These are responses to specific tweets of his. Nothing more. Nothing less.
(1) Rajan knows non-formal sector gives 50% GDP, 90% of non-farm jobs, but gets only 4% bank credit. Borrows @ huge int. Still he blocks Mudra law.
We do not know if non-formal sector includes the self-employed because a substantial number declares itself self-employed. There has to be a clear definition of what he means by the non-formal sector and what its constituents are, before the discussion can begin. But, at least in the Factories Sector, it is not true that the small factory owners are the generators of output and creators of employment. Facts do not bear that out. All that one has to do is to open the Annual Survey of Industries 2012-13 and turn to the relevant section (Section ‘7 Distribution of Factories in Operation by Size of Employment’ for the relevant data).
Second, I have no idea if RBI is blocking Mudra law. I have not heard this before. But, that does not mean that he is wrong. Simply that I have not heard of it.
(2) He wants to show he is most responsible central bank Governor over all West, US, China n Japan — all at India’s cost.
(He has re-tweeted Minhaz Merchant who links to an August 2015 article in ET on RBI Governor. We have no idea if the author of that article knows enough economics and economic history to understand that interest rates are not effective in a balance sheet crisis. In any case, since then, interest rates have been cut aggressively.)
(3) That man has come with an agenda n he is doing it.
(This tweet is the explanation for a retweet of another tweet by one Narayan Nedungadi, who too links to the August 2015 article by Vatsal Srivastav).
(This Mr. Nedungadi himself does not appear to be an economist. But, he is prepared to say that Raghuram Rajan is no economist with the implication that he cannot, therefore, be RBI Governor. See his tweet here and he had tweeted an article published in August 2015 by someone about him we seem to know very little, especially his knowledge of economics).
(4) Banks are being cleaned on Basel model which is not needed here as 35% of deposits are in govt. bonds. RBI lacks guts to tell the West this.
Let us put it this way. If someone has taken a loan and bought property and if they had paid 35% upfront themselves, then for the lender, that is an effective protection. The lender starts to lose money only after the asset value drops more than 35%. But, that is not the situation with Indian banks.
The fact that banks have 35% of their deposits in government bonds does not mean that they can be irresponsible with the remaining 65% of their assets and that the central bank should remain unconcerned because they have 35% safe assets (I am not sure if that number is correct, in the first place).
I am not even sure why he is defending Indian banks’ lending and corporate borrowing, done in the UPA days, when cronyism was rampant. Making banks clean up their balance sheets is not the same as questioning banks’ soundness. 35% may mean that the banks are ultimately safe but they cannot lend more if their past loans are not collected. We do not want the economy to suffer from lack of credit. Hence, the argument that the Basel model does not suit India is rather strange.
Furthermore, we cannot argue in one breath that RBI should have cut rates for more loans to be made and fault the RBI for going after bad loans made by banks! If rates are cut, banks’ margins drop and they won’t be able to make new loans without collecting old ones.
(5) Congratulate Modi govt. for giving up EU 3% fiscal deficit target by amending FRBM law for flexible rates. It is defiance of Rajan too.
This is wrong. The government did nothing of the sort.
This is what I understood from very reliable sources:
“State governments need central permission to borrow from markets–it is a constitutional provision. Bloomberg has misunderstood. The 3% limit has been in force since the states passed FRBM Act about 12 years ago when they were incentivised to do so. The limit comes from their own state laws. But now the centre has agreed that they can get an additional 0.5% if they meet certain conditions like low debt-to-GDP ratio and low interest to revenue ratio and have no revenue deficit. What was approved is a conditional increase–not a new limit.”
(6) Not saying Rajan doesn’t appreciate Modi govt. But, that is not the test of a Governor. Does he understand India is different is the issue.
India is not so different from the rest of the world that natural laws of economics can be suspended indefinitely for India. Sovereigns can tax and hence they can live beyond their means a little longer than individuals or companies. But, it is certainly not into eternity. Similarly, we cannot cut interest rates and expect to raise our savings ratios such that we do not invite those ‘evil’ foreigners to invest in our assets or lend to us. We cannot have it in every whichever way possible.
(7) Finally, I am not sure if many of those who jumped into the fray to attack the RBI Governor had actually gone through the full transcript of his interview. Here is the link, for them.
Specifically, on the question related to India that triggered the controversy, read the question and the answer and reflect on whether it meant any insult to any person or the sovereign or the government. It was a typical self-effacing, polite middle-class response to a question on whether India had any secret sauce.
MarketWatch: The Indian economy is the bright spot in the global economy. When other central bankers and finance ministers ask you for your secret sauce, what do you tell them?
Rajan: Well, I think we’ve still to get to a place where we feel satisfied. We have this saying, “in the land of the blind, the one-eyed man is king.” We’re a little bit that way. We feel things are turning to the point where we could achieve what we believe is our medium-run growth potential. Because things are falling into place. Investment is starting to pick up strongly. We have a fair degree of macro-stability. Of course, not immune to every shock, but immune to a fair number of shocks.
The current account deficit is around 1%. The fiscal deficit has come down and continues to come down and the government is firm on a consolidation path. Inflation has come down from 11% to less than 5% now. And interest rates therefore can also come down. We have an inflation-targeting framework in place. So a bunch of good things have happened.
There is still some things to do. Of course, structural reforms are ongoing. The government is engaged in bringing out a new bankruptcy code. There is goods and services tax on the anvil. But there is a lot of exciting stuff which is already happening. For example just last week, I was fortunate to inaugurate a platform which allows mobile-to-mobile transfers from any bank account to any other bank account in the country. It is a public platform, so anybody can participate. It is not owned by any one company unlike Apple Pay or Android Pay or whatever. I think it is the first of its kind. So technological developments are happening and making for a more, hopefully, reasonable life for a lot of people. Let’s see how it goes.
After downplaying India’s economic strength, the Governor goes on to list the things that the Indian government has done and acknowledges the stability in the Indian economy.
What are we arguing about, here, for God’s sake? I am yet to figure that one out.
(8) For those who know Tamil, I would like to leave them with the following Thirukkural:
குணம்நாடிக் குற்றமும் நாடி அவற்றுள்
மிகைநாடி மிக்க கொளல்.
Weigh well virtues and vices in men;
Judge them by those that prevail the most
On balance, Raghuram Rajan is good for India.
India does not have the luxury of allowing prejudices to prevail over pragmatism in people selection for policy roles.
(9) Absolutely finally, I am grateful to Shri. Gurumurthy for the following tweet:
Simple commentary by Swami Tapasyananda of RK Mission is one of the simplest n best
This was in response to this tweet:
“Respected Sir, where to get a proper Bhagwat Gita with its commentaries that helps us in today’s society?”